FINANCIAL REPORTING (F7/FR)

ASSIGNMENT 3
(Syllabus areas: IAS 12, IAS 33, Final accounts, Consolidation)

QUESTION 1

On 1 October 20X6 Paragon acquired the following non-current investments:

Only the cash consideration of the above investments has been recorded by Paragon.

The summarised draft statements of financial position of the three companies at 30 September 20X7 are:

Paragon Santa Logan

Assets
Non-current assets
Investments in Santa
Property, plant and Logan
and equipment 24,000
36,800 nil
20,800 nil
36,000
Investments at FVTPL 13,000 nil nil
––––––– –––––– –––––––
73,800 20,800 36,000
Current assets
Inventory 13,800 12,400 7,200
Trade receivables 6,400 3,000 4,800
––––––– ––––––– –––––––
Total assets 94,000 36,200 48,000
––––––– ––––––– –––––––
Equity and liabilities
Equity shares of $1 each 20,000 8,000 8,000
Retained earnings – at 30 September 20X6 32,000 13,000 22,000
– for year ended 30 September 2007 16,000 4,800 10,000
––––––– ––––––– –––––––
68,000 25,800 40,000
Non-current liabilities
8% Loan notes 10,000 2,000 2,000
Current liabilities 16,000 8,400 6,000
––––––– ––––––– –––––––
Total equity and liabilities 94,000 36,200 48,000
––––––– ––––––– –––––––
The following information is relevant:
(i) At the date of acquisition the fair values of Santa’s assets were equal to their carrying amounts
with the exception of Santa’s land which had a fair value of $1 million below its carrying amount; it
was written down by this amount shortly after acquisition and has not changed in value since then.

(ii) On 1 October 20X6, Paragon sold an item of plant to Santa at its agreed fair value of $5 million. Its
carrying amount prior to the sale was $4 million. The estimated remaining life of the plant at the
date of sale was five years (straight-line depreciation).

(iii) During the year ended 30 September 20X7 Santa sold goods to Paragon for $5.4 million. Santa had
marked up these goods by 50% on cost. Paragon had a third of the goods still in its inventory at 30
September 20X7. There were no intra-group payables/receivables at 30 September 20X7.

(iv) Impairment tests on 30 September 20X7 concluded that the value of the investment in Logan was
not impaired, but consolidated goodwill was impaired by $1,000,000.

(v) The investments at fair value through profit or loss (FVTPL)are included in Paragon’s statement of
financial position (above) at their fair value on 1 October 20X6, but they have a fair value of $18
million at 30 September 20X7

(vi) No dividends were paid during the year by any of the companies.

Required:
Prepare the consolidated statement of financial position for Paragon as at 30 September 20X7.
(20 marks)
 QUESTION 2

After preparing a draft statement of profit or loss (before interest and tax) for the year ended 31 March
20X6 (before any adjustments which may be required by notes (i) to (iv) below), the summarized trial
balance of Saphhire Co as at 31 March 20X6 is:

$'000 $'000
Equity shares of $1 each 50,000
Retained earnings as at 1 April 20X5 3,500
Draft profit before interest and tax for year ended 31 March 20X6 30,000
6% convertible loan notes (note (i)) 40,000
Leased property (original life 25 years) - at cost (note (ii)) 75,000
Plant and equipment - at cost (note (ii)) 72,100
Accumulated amortization/depreciation at 1 April 20X5: leased property 15,000
plant and equipment 28,100
Trade receivables (note (iii)) 28,000
Other current assets 9,300
Current liabilities 17,700
Deferred tax (note (iv)) 3,200
Interest payment (note (i)) 2,400
Current tax (note (iv) 700
187,500 187,500

The following notes are relevant:

(i) Saphhire Co issued 400,000 $100 6% convertible loan notes on 1 April 20X5. Interest is paid annually
in arrears on 31 March each year. The loans can be converted to equity shares on the basis of 20 shares
for each $100 loan note on 31 March 20X8 or redeemed at par for cash on the same date. An equivalent
loan without the conversion rights would have required an interest rate of 8%.

The present value of $1 receivable at the end of each year, based on discount rates of 6% and 8%, are:

6% 8%
End of year 1 0.94 0.93
End of year 2 0.89 0.86
End of year 3 0.84 0.79

(ii) Non-current assets:

The directors decided to revalue the leased property at $66·3m on 1 October 20X5. Saphhire Co does
not make an annual transfer from the revaluation surplus to retained earnings to reflect the realization
of the revaluation gain; however, the revaluation will give rise to a deferred tax liability at the
company’s tax rate of 20%.

The leased property is depreciated on a straight-line basis and plant and equipment at 15% per annum
using the reducing balance method.

No depreciation has yet been charged on any non-current assets for the year ended 31 March 20X6.

(iii) In September 20X5, the directors of Saphhire Co discovered a fraud. In total, $700,000 which had
been included as receivables in the above trial balance had been stolen by an employee. $450,000 of
this related to the year ended 31 March 20X5, the rest to the current year. The directors are hopeful
that 50% of the losses can be recovered from the company’s insurers.

(iv) A provision of $2·7m is required for current income tax on the profit of the year to 31 March 20X6.
The balance on current tax in the trial balance is the under/over provision of tax for the previous year. In
addition to the temporary differences relating to the information in note (ii), at 31 March 20X6, the
carrying amounts of Saphhire Co.’s net assets are $12m more than their tax base.

(a) Prepare a schedule of adjustments required to the draft profit before interest and tax (in the
above trial balance) to give the profit or loss of Saphhire co. for the year ended 31 March
20X6 as a result of the information in notes (i) to (iv) above.

(b) Prepare the statement of financial position of Saphhire Co. as at 31 March 20X6.

(c) The issue of convertible loan notes can potentially dilute the basic earnings per share (EPS)

Calculate the diluted earnings per share for Saphhire co. for the year ended 31 March 20X6.
(There is no need to calculate the basic EPS)

Note: A statement of changes in equity and the notes to the statement of financial position are not
required.

The following mark allocation is provided as guidance for this question:

(a) 5 marks

(b) 12 marks

(c) 3 marks

(20 marks)